Greece offers investors bond swap

53.5% write-down sought on 206 billion euros of government debt

By

WilliamL. Watts

FRANKFURT (MarketWatch) — Greece on Friday detailed a formal offer to private creditors to swap government bonds in an effort to knock more than 100 billion euros off of the country’s massive debt pile.

Greece’s cabinet approved details of the swap, a component of the country’s latest multibillion-euro international rescue, in a meeting Friday.

The swap comes after euro-zone finance ministers early Tuesday backed a bailout package of 130 billion euros ($174 billion) for Greece — its second rescue in two years. European leaders demanded last year that private-sector bond holders bear part of the burden of a second rescue package, prompting the controversial debt swap.

Strategists said financial-market participants have largely put concerns about Greece to the side since the meeting of euro-zone finance ministers earlier this week.

The euro pushed to a three-month high above $1.34 and rallied versus other currencies Friday. The euro
EURUSD, -0.7836%
changed hands in recent action at $1.3467, a gain of 0.8% from Thursday, and fetched 108.86 Japanese yen
EURJPY, -0.62%
a 1.8% jump. Read Currencies.

The Greek finance ministry said the offer will seek to swap up to €206 billion of outstanding government bonds for newly-issued debt that will carry lower interest rates and longer maturities. Participating investors will give up 53.5% of the principal they would have earned on the old bonds.

If investors fully participate, the exchange would knock around €107 billion off of Greece’s debt load, which stood near €350 billion at the end of the third quarter of 2011.

Participating investors will receive bonds with maturities up to two years, worth the equivalent of 15% of the face value of the old bonds.

The remaining 31.5% will come via new long-dated Greek bonds. Investors will also receive securities that will allow bond holders to reap supplementary interest payments if Greece’s inflation-adjusted growth in gross domestic product exceeds a baseline set by the European Union, the International Monetary Fund and the European Central Bank

While billed as voluntary, bond holders can get their arms twisted to participate. The Greek government has approved collective-action clauses that would allow investors holding two-thirds of the bonds to force all private creditors to tender their bonds if overall participation is insufficient.

That would likely lead to a determination by an international derivatives body that the exchange was coercive, triggering a “credit event” that would require the payout of credit default swaps, derivative instruments that can be used to hedge against debt nonpayment. Read more about CDS.

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